What Will Happen

Monday February 13, 2017, Prime Minister Justin Trudeau meets with President Donald Trump in the White House for their first face-to-face encounter. This working visit will include a private meeting in the Oval Office for probably no more than half an hour. We can expect the official photo to show a stern-looking Mr. Trump and a smiling Mr. Trudeau, indicative of their respective public personalities.

The topics of discussion will likely revolve around three main baskets: security, trade, and energy. Mr. Trudeau will deliver three main messages: Canada is a reliable ally; Canada is a fair-trading partner and, as he tweeted in announcing the visit, “Strong Canada-US ties help the middle class in both our countries”; and Canadian energy helps fuel the manufacturing renaissance that Mr. Trump wants to create.

At some point, Mr. Trump will try to provoke Mr. Trudeau, perhaps by suggesting that Canada lets in terrorists, a jab at Canada’s intake of Syrian refugees. As Mr. Trump describes in his book The Art of the Deal, this is part of his modus operandi in how he assesses people, as he has already demonstrated in his telephone calls with Australian Prime Minister Malcolm Turnbull and Mexican President Enrique Peña Nieto. Bluffing, bullying and bravado are all part of Trump’s repertoire but as Trudeau has often demonstrated, Canada’s Prime Minister has both considerable charm and a counterpunch.

In terms of outcomes, from a Canadian perspective, if Mr. Trudeau leaves with agreement on a handful of issues where interests converge - continuing with regulatory reform; improving border access for people (especially business travellers, including bringing the NAFTA professions list into the digital age) and goods (including expanded pre-clearance); and joint infrastructure projects - we will have made progress.

No one expects the kind of bromance that characterized the relationship with Barack Obama. Having a good, working relationship with Mr. Trump will be sufficient. The Goldilocks strategy is the right one: quiet engagement while not letting relations get too hot nor too cold.

Although his first year honeymoon, that saw his polling numbers over 50 percent, is over, Mr. Trudeau still leads in popularity. He goes into his meeting with broad public support. A Nanos survey (Feb 7) found that Canadians are confident the Government will be forceful in promoting Canada’s economic interests with the US; and that they would favour retaliation if the US imposed border tax measures. Canadians are also supportive of the government’s climate policy. Two recent reports – Positioning Canada as a Global Trading Hub by the Advisory Council on Economic Growth (Feb 6) and Free Trade Agreements: A Tool for Economic Prosperity (Feb 7) by the Senate Foreign Relations Committee underline the importance of trade to Canadian prosperity.

Setting the Stage

In the lead-up to this historic visit, Canadian Ambassador David MacNaughton has done a lot of quietly effective spadework, working with Prime Minister Trudeau’s senior staff to get to know the key Trump players. A Trump confidante attended the recent Calgary cabinet retreat. Cabinet ministers have been reaching out to their counterparts.

These discussions help set the scene for the leaders’ meeting by underlining the core Canadian messages on security, trade, and energy. These messages need to be repeated time and again. They also need to be made ‘local’, as Foreign Affairs Minister Chrystia Freeland did in her meeting with Speaker Paul Ryan, reminding him that Wisconsin’s main export market is Canada, and that our trade generates 159,000 jobs in Wisconsin.

Working the congressional leadership is a smart move.

It underlines the peer-to-peer relationships as elected legislators that Canadian Ministers share with members of the House and Senate. Defence Minister Harjit Sajjan met with Defense Secretary Jim Mattis on February 6th.

Image: Press Release: Speaker Paul Ryan

Security Basket

North American security issues break down into three dimensions: homeland and perimeter security; collective security, including NATO; and the larger international security, including peace operations. All of these issues were raised in the recent meeting between Harjitt Sajjan and Jim Mattis that, according to the Pentagon readout, “reaffirmed the US-Canada defense relationship, emphasizing their commitments to NORAD and continental defense, and agreeing to deepen cooperation to protect North America…US and Canadian leadership as Framework Nations for Enhanced Forward Presence, members of the international counter-ISIL coalition, and support for United Nations peacekeeping.”

While Americans consistently rank Canada as their best friend and a reliable ally, the nightmare scenario for every Canadian Prime Minister would be a terrorist attack on the US whose perpetrator(s) can be traced to Canada. There continues to be a mythology about the 9/11 terrorists coming out of Canada; though none of the hijackers entered the US from or through Canada, it has not stopped senior American politicians from thinking of Canada as the broken back door.

This attitude sparked the US Senate Homeland Security committee to hold hearings in February 2016 with Chair Ron Johnson (R-Wisonsin) asking “Will there be shortcuts taken?” The US Border Guard Service representative (whose union backed Trump in the election) argued for increasing its staff along the northern border by 1500 to supplement the 2100 in place, and pointed out that there are “over five million foreign visitors entering Canada annually…Canada is a diverse nation and has a per capita Muslim population three times our own…they have major inflows from tourists and business travellers and throughout the Middle East”.

While there is recognition that the relationships between the security and intelligence agencies (CSIS and CIA, NSA and CSE), police forces (FBI and RCMP) and state/province and city (Public Safety and Homeland Security) are excellent with good lines of communication and sharing of information (eg. passenger lists for cross-border rail and air traffic, as well as refugee claimants), the USA will probably press for more.

The legal constraints are Canadian privacy laws that have been supported by the courts. The relationship between Homeland Security Secretary John Kelly and Public Safety Minister Ralph Goodale will be critical; Goodale developed a very good relationship with Obama Homeland Security Secretary Jeh Johnson.

On perimeter security, there is already very close collaboration through the North American Aerospace Defense Command (NORAD). Our bi-national security pact, established in 1958, is responsible for aerospace warning and aerospace control, including the monitoring of man-made objects in space, and the detection, validation, and warning of an attack against North America whether by aircraft, missiles, or space vehicles. Since 2006 its mandate has also included a maritime warning mission covering our maritime approaches, maritime areas and inland waterways. By custom, the Commander of NORAD is an American officer and the Deputy Commander a Canadian. While there is no longer a requirement for formal renewal, Canada and the US agreed to continue reviewing the roles and responsibilities of the bi-national command, including the relationship between NORAD and the two national commands (CJOC and US NORTHCOM).

With increased Russian activity in the North, there is pressure to ‘up’ our game. The Trudeau government recently announced plans to replace the CF-18 fighter aircraft that, in the short term, would include the acquisition of 18 new Super Hornets. As the news release noted:

Canada’s current fleet is now more than 30 years old and is down from 138 aircraft to 77. As a result, the Royal Canadian Air Force (RCAF) faces a capability gap. We have an obligation to NORAD to have a certain number of fighter jets mission-ready at all times, as well as an obligation to NATO. The number of mission-ready planes we can put in the air today is fewer than our NORAD and NATO obligations combined.

There will also likely be some discussion of Canadian participation in Ballistic Missile Defence, although the US has been very clear that this is for Canada to decide and it will likely feature in the Trudeau Government’s Defence Review, which is expected to be released in the coming weeks. However, the increased threat capacity posed by North Korean missiles, even if aimed at the continental US, could well reach Canada and there is also renewed activity by Iran. While rejected by the Martin government, the Harper government would likely have endorsed BMD for Canada in its planned defence review. After study in 2015-16, Canada’s National Defence Senate Committee recommended Canada join BMD.

If Mr. Trump has sounded ambivalent about NATO, he has recently said he “strongly supports” the Alliance but that he expects the rest of the Alliance to “make their full and proper share”. He can be expected to raise this when he attends the NATO summit in May. Burden-sharing is a theme sounded by every American president. When President Obama came to Ottawa in June 2016, he told parliamentarians not once but three times that NATO needs more Canada. The NATO benchmark is 2 percent of GDP. In its January assessment of NATO members, Canada stood at .99 percent; by GDP ranking 24th of the 27 members.

The Trudeau government has reinforced Canada’s NATO commitment, promising at the Warsaw Summit (July, 2016) an Air Task Force as well as a deployment of troops to Latvia. The Trudeau Government has also made a commitment to peace operations – both armed forces and police – and is considering a mission to Mali but as Defence Minister Harjit Sajjan recently observed “There is no date set … Canadians expect us to make sure we get this decision right.”

Image: The Canadian Press/Adrian Wyld

Energy Basket

For Trump and Trudeau, there will be no meeting of the minds on climate, as there was with President Obama. President Trump has threatened to withdraw the US from the Paris Climate Accord.

On energy issues, there is opportunity. During his first week in office Trump signed two executive orders intended to revive Keystone XL and the Dakota Access pipelines as outlined in his America First energy plan (May, 2016) that he released at an oil industry conference in Bismarck, North Dakota during the campaign.

Trans Canada has renewed its application for a presidential permit, noting that the project “will support tens of thousands of direct and indirect jobs and associated income during construction and contribute approximately $3.4 Billion to US GDP” and that its employees live in the 30 states where it operates. Speaking at the Calgary cabinet retreat at the end of January, Prime Minister Trudeau voiced his support for the $8-billion project, which could carry more than 800,000 barrels of Alberta oil a day to refineries in Texas.

There should be a number of opportunities for cooperation and collaboration with the US and the Department of Energy. Natural Resources Minister Jim Carr should work out arrangements with Secretary-designate Rick Perry around joint projects that will make the most efficient use of our energy resources through infrastructure projects and research. The trilateral Energy Ministers’ meetings should be continued, as they act as a catalyst to move shared energy issues.

A useful starting point for new activity would be the recent Conservative Climate Leadership Council report (whose authors include former secretaries of state George Shultz and James Baker as well as economists Marty Feldstein and Greg Mankiw) that argues for a carbon tax with public rebates and a border tax on those nations without comparable carbon pricing.

Trade Basket

Trade issues are Canada’s top priority, and is not without challenges such as Mr. Trump’s demand for a re-negotiation of NAFTA, ongoing US protectionism including state-level ‘Buy America’ provisions, as well as US pressure around trade irritants, including softwood lumber.

The US trading relationship is primordial. The biggest single market in the world, the US accounts for ¾ of our trade which generates almost 1/3 of Canadian GDP. Few Presidents in recent history have been as obsessed with the trade deficit as Donald Trump. In a trading relationship of over $US 550 billion (US’ second biggest after China); Canada enjoyed a slight surplus ($US 11.2 billion) in 2016.

There have been various and necessary efforts to diversify our trade through bilateral and multilateral agreements. The most recent include the Trans Pacific Partnership (TPP) - that Mr. Trump has scuttled through an executive order - and the Comprehensive Economic and Trade Agreement (CETA) with Europe. CETA remains on course with Mr. Trudeau speaking to the EU Parliament on February 16 (hopefully after CETA ratification by the EU Parliament).

Nonetheless, the US remains Canada’s market of choice for reasons of size and geographic propinquity.

In her mandate letter, Foreign Minister Chrystia Freeland, who keeps responsibility for Canada-US trade, is instructed to “lead a whole-of-government approach and strategy” to “deepen trade and commerce” and “maintain constructive relations with the United States, Canada’s closest ally and most important economic and security partner.”

Of the 50 U.S. states, 48 of them count Canada as their first, second or third most important export market

Image: Government of Canada

President Trump condemned NAFTA during the campaign, but recently has said that he is open to a “renovation” or a “brand new NAFTA and we add an extra ‘F’ in NAFTA, for free and fair trade.”

Commerce Secretary Wilbur Ross will lead, with support from Peter Navarro, head of the new National Trade Council; Robert Lighthizer, designated head of the United States Trade Representative Office (USTR); and Jason Greenblatt, special negotiator for trade in the White House. In his confirmation hearing, Secretary Ross said “NAFTA is logically the first thing for us to deal with. We ought to solidify relationships the best way we can in our territory.”

The trade relationship has broad support from business on both sides of the border. In an Ottawa speech (February 6), US Chamber of Commerce CEO Tom Donahue said: “Withdrawing from NAFTA would be devastating for the workers, businesses and economies of our countries. Let's do no harm. Let's preserve, protect, and advance the robust trade that supports both of our economies and millions of our workers”.

While Canada does not have votes in US elections, nor do most Canadian companies contribute to US campaigns, we do generate employment – an estimated 9 million jobs across the US according to a study commissioned by the Canadian Embassy. Fact sheets (available on the Canadian Embassy website) break this down by state and getting out this message must be a top priority for Ministers, Premiers, legislators, business and labour leaders, as well as our Ambassador and consuls.

What the US Wants

There is a lot of ‘unknown unknowns’ around reopening NAFTA. Does the US want to negotiate trilaterally or conduct two bilateral negotiations, i.e. US-Canada; US-Mexico? Will the US withdraw from NAFTA (with six months notice under article 2005)? If so, will Canada and Mexico keep NAFTA intact?

Image: Government of Canada

CNN obtained a memoranda (Nov 16) indicating that the Trump administration wants “amendments to the treaty, which could include measures on currency manipulation, lumber, country of origin labeling and environmental and safety standards.” Dispute settlement in the NAFTA, including Chapter XI on Investment and investor-state disputes and Chapter XIX on Dispute Settlement in antidumping and countervailing duty matters, has also been signaled for review.

While they specifically point to China’s entry into the WTO and the US-Korea trade deal, they also name NAFTA as a culprit, arguing it has cost 850,000 jobs and that the US trade deficit with Mexico has soared from zero to $60 billion. They point to the annual National Trade Estimate published by the United States Trade Representative (USTR) as the starting point for what the US needs to fix.

Unequal treatment on the sale of US wines in British Columbia and Ontario (we are being stupid on this one);

Canadian customs regulations on personal exemptions, including the low threshold i.e. minimums on goods shipped by mail - $20 in Canada vs $800 in the US. As the CD Howe Institute recently argued this is one we need to reform;

Support to Canada’s aerospace industry (although the US also provides support to its industry);

Government procurement, especially by provincial institutions like Hydro Quebec;

Intellectual property regulations on pharmaceuticals (the US gives longer protection);

Failure to inspect in-transit goods for counterfeits (on this we shot ourselves in the foot in not providing for this in 2014 legislation);

Telecommunications foreign ownership restrictions in domestic content broadcast regulations (that have created a healthy Canadian music industry);

Investment barriers and the net benefit requirement for foreign investors (although this is small potatoes as Canada is essentially open for business except to foreign state-owned enterprises); and

Curbing cross-border data flows that would preclude using US cloud facilities (although after the Snowden revelations, there are legitimate concerns about privacy).

Other items that the Trump administration has identified include:

Border Adjustment Tax: A centerpiece of the Trump program is tax reform favouring a tax on consumption rather than investment. His objective is to stimulate investment, private and public, in infrastructure and capital goods. Lowering corporate tax, which will have implications for Canada (our corporate tax is lower) is part of the solution. Another piece, favoured by Speaker Ryan, is a border adjustment tax on goods imported into the US, although Mr. Trump has said that it is “too complicated”. Depending on its implementation, it could be highly disruptive to supply chain dynamics especially in the automotive industry – autos are our biggest traded manufactured commodity.

Rules of origin, especially in the context of manufacturing: While the Obama administration was prepared to lower the threshold for North American content to do a deal with Japan in the Trans Pacific Partnership negotiations (to the alarm of both Canada and Mexico), the Trump administration wants to raise the American-made content and perhaps define it to ‘Made in the USA’. This would create major headaches for auto parts suppliers and the assembly process given the deep continental integration and supply chain dynamics.

Dispute settlement: Without bi-national dispute settlement, Canada was ready to walk out on the Canada-US free trade negotiations.

What Canada Wants

Canada has pushed consistently to update the list of professionals given expedited passage under NAFTA to help with servicing and training, especially for intra-company travel by the big enterprises like GM and GE.

Given our nascent reinvestment in shipbuilding we would like access to US procurement that is currently prevented by the Jones Act (and we have an ally in Senate Armed Services Committee Chair John McCain, who would like it repealed).

There is also a growing trend towards state protectionism, most recently in New York, that requires all state procurements to be sourced from New York vendors. State legislatures in Wyoming and South Dakota are also considering legislation to require retail beef products sold in the state to bear a country-of-origin label.

Canadian Premiers will need to work with their state governor counterparts to renew and update the reciprocity agreement signed in February 2010 around the Obama infrastructure stimulus program, especially if President Trump is successful in securing congressional passage of a similar infrastructure stimulus program.

Image: Government of Canada

What to do about Softwood Lumber

Softwood lumber, or timber as it is called in the US, was likely the first trade dispute, dating back before Confederation to the George Washington administration when Massachusetts timber merchants (Maine was then part of Massachusetts) sought redress about competition from New Brunswick lumber used in shipbuilding. It has been a regular, unfortunate, and visceral feature of Canada-US relations for much of the last half century. The rancor over shakes and shingles almost undid the Canada-US free trade negotiations. A series of carefully negotiated agreements have managed the trade with the last agreement expiring in September 2015 (with a year’s moratorium on retaliatory action).

At the crux of the dispute are our different practices on domestic support and taxation, with most US timber harvested from private lands (as in our Maritimes) rather than public lands (as in the rest of Canada). Even though the industry is increasingly integrated in terms of ownership, there remains lots of small timber holdings, especially in the south-eastern US who view Canadian practices as subsidized by government. Represented by the US Lumber Coalition, they are seeking redress through US trade remedy laws. In a useful paper for the Canada Institute at the Wilson Center, Eric Miller suggests the appointment of special envoys leading to a market-based future.

An asymmetrical relationship

The Canada-US relationship is asymmetrical: they matter to us more than we matter to them. We depend on the US for our economic prosperity and our security. When it comes to our international relationships it is always the United States first, and then the rest.

For the first part of our history, as a French and then British colony, the US was the adversary and threat - invasions during the War of Independence, War of 1812-14, the Fenian raids after the Civil War – and the threat of absorption into the ‘manifest destiny’ of the US was a catalyst for Confederation. Relations improved. We agreed to bi-national management of our shared waterways (1909) but rejected a free trade agreement (1911). Just before the Second World War, Mackenzie King and Franklin Roosevelt put in place trade and security agreements that gave Canada preferred access to the US market and the US a loyal ally.

Successive Presidents and Prime Ministers have built and consolidated their far-sighted statecraft on security, trade, and the environment through notably NORAD (1958), Autopact (1965), Great Lakes Water Agreement (1978), Canada-US FTA (1988), Acid Rain Agreement (1991), and NAFTA (1993-4).

How does Mexico fit into this?

It would appear the Trump administration does not want a trilateral negotiation on NAFTA but rather dual bilaterals i.e. Mexico-US and Canada-US. In his June economic speech on ‘Declaring America’s Economic Independence’, Mr. Trump declared he would “immediately renegotiate the terms of [NAFTA] to get a better deal for our workers” and that “we need bilateral trade deals. We do not need to enter into another massive international agreement that ties us up and binds us down.”

While this is not the preferred approach of either Canada or Mexico, this may be the outcome with both sides taking an approach of ‘constructive parallelism’ – sharing intelligence on US objectives and informing one another of our approach (i.e. no surprises), mindful that our situations are different and that we have to defend and advance our own interests.

Canada and Mexico need to stick together. We should keep the NAFTA alive and update it with what was already negotiated through the Trans Pacific Partnership. We should look to new partners – the United Kingdom, the members of the Pacific Alliance (Chile, Columbia, Peru) of which Mexico is a member and Canada has observer status.

Further Reading

There are various recommendations from business and other groups on how we can improve North American economic integration. The SAGE (Strategies, Advocacies, Gateways, Engagement) group, a loose association of Canada-US business groups is consulting around a re-imagined Canada-US relationship and the Pacific Northwest Economic Region (PNWER) has an active group looking at specific proposals.

The Canada Institute at the Wilson Center does excellent work on Canada-US relations (often in collaboration with its counterpart Mexico Institute). A lot of practical work is done by the North American Strategy for Competitiveness (NASCO) and by the Canadian American Border Trade Alliance. The Canada-US business relationship is an ongoing preoccupation for the Business Council of Canada, Canadian Chamber of Commerce, the American Chambers of Commerce in Canada, Canadian Manufacturers and Exporters and I.E. Canada - Canadian Association of Importers and Exporters. The Council of the Great Lakes Region has written to Prime Minister Trudeau and President Trump with specific recommendations including expanding the Integrated Border Enforcement Teams (IBET) and creating a free trade zone in the region. The Canada West Foundation has made specific recommendations around infrastructure.

The Canadian American Business Council has put forward ten useful proposals around Canada-US trade including making permanent the Regulatory Coordination Council; creating a zero-tariff zone, mutually recognized standards, testing and certification; revising procurement rules to include all jurisdictions, state and federal, in Canada and the US i.e. buy ‘Canada-US’; further integration of our energy potential through joint infrastructure and regulatory standards; easier movement by professionals; and more predictable border processing.

Eric Miller, John Dillon and Colin Robertson authored a report Made in North America(2014) for the Business Council of Canada. The School of Public Policy at the University of Calgary, the School of Global Studies at the Universidad Anáhuac México Norte, the College of Public Service and Community Solutions and the Morrison Institute at Arizona State University hosted the third in a series of conferences on North America. The March conference, ‘Unlocking North American Competitiveness’ produced a series of preparatory papers and then specific recommendations on the energy sector, transportation infrastructure, and supply chain security.

Image:The Chronical Herald

About the Author

A former Canadian diplomat, Colin Robertson is Vice President and Fellow at the Canadian Global Affairs Institute and Executive Fellow at the University of Calgary's School of Public Policy. He is Senior Advisor to Dentons LLP working with the Business Council of Canada. He is a Distinguished Senior Fellow at the Norman Paterson School of International Affairs at Carleton University. He is a member of the advisory councils of the Conference of Defence Associations Institute and the North American Research Partnership and participant in the North American Forum. He is a past president of the National Capital Branch of the Canadian International Council. He is an Honorary Captain (Royal Canadian Navy) assigned to the Strategic Communications Directorate. He writes a column every two weeks on international affairs for the Globe and Mail and he is a regular contributor to other media.

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